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Pound to Dollar Rate Rallies to 1.2650, Asian Warnings Keep USD in Check

March 26, 2024 - Written by David Woodsmith


The U.S. Dollar was hampered by two global developments during Monday and drifted lower in global markets.

In this context, European currencies were also able to secure some relief, although overall moves were still relatively limited.

The Pound to Dollar (GBP/USD) exchange rate found support close to 1.2600 and edged higher to near 1.2650 after the US open.

The dollar index overall retreated to 103.85 from 104.15 highs on Friday.

Firstly, there was additional speculation over possible Bank of Japan intervention to support the yen following comments by Masato Kanda, Japan's vice finance minister for international affairs.

Kanda stated that weakness in the Japanese currency did not reflect fundamentals and that the current weakening of the yen is not in line with fundamentals and is clearly driven by speculation.”

When asked about potential intervention he stated that; “we are always prepared.”

According to MUFG; “we do expect verbal intervention from Japanese officials to help dampen further upside for USD/JPY in the near-term.”

ING noted that the yuan weakened late last week and commented; “markets were speculating that the People's Bank of China (PBoC) might have taken a decision for one of its episodic bouts of CNY depreciation – a move which generally carries Asian FX with it and provides support to the dollar globally.

The bank, however, added; “Fortunately, the PBoC has today pushed back against ideas of a CNY down-leg by delivering a stronger CNY fixing. There have also been reports of state banks selling dollars – all pointing to the view that Chinese authorities prefer a stable renminbi as it works through economic challenges at home.”

MUFG added; “We remain unconvinced at the current juncture that Chinese policymakers will now allow a much weaker renminbi. We still believe that maintaining currency stability is an important policy goal for China.”

ING still sees attractive short-term factors for the dollar; “A surging US stock market and the implications for US confidence and consumption make it hard to argue with the dollar right now, warning that DXY can push up to the 105.00 area.

From a longer-term point of view it added; “but we continue to expect this strength to be temporary and would prefer to position for a second-quarter downtrend.”

The latest COT data, released by the CFTC recorded a sharp decline in long, non-commercial Sterling positions to just over 53,000 contracts from over 70,000 the previous week.

Scotiabank noted; “net GBP longs were cut USD1.4bn this week by speculative traders while real money accounts nearly doubled net GBP shorts (to USD3bn). Hedge funds boosted net GBP longs some USD700mn, however.”

As far as UK data is concerned, the CBI distributive trades survey recorded a recovery in the retail sales index to 2 for March from -7 previously and compared with expectations of -13.

Retailers, however, expect a renewed decline for April with a notably negative reading of -25.

According to CBI Principal Economist Martin Sartorious; “The stabilisation of retail sales in March should give some hope that the sector’s downturn is bottoming out. The earlier timing of Easter will likely mean weaker year-on-year sales in April, but easing inflation should support retail spending going forward.”

Markets continued to debate the outlook for Bank of England interest rates after last week’s policy meeting.

MUFG commented; “While it is not our base case scenario, the comment indicates that the BoE could begin to cut rates as soon as at the next MPC meeting in May although it would likely require a significant downward revision to the inflation forecasts that helps ease concern amongst MPC members over a pick-up in inflation in the 2H of this year.”

The bank noted that the UK rate market still judges that a May rate cut remains a low probability around 25% compared with around 75% for June.
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